Aug. 2 (Bloomberg) -- European Central Bank President Mario
Draghi said the ECB may wade forcefully into bond markets in
tandem with Europe’s rescue fund, stepping up its crisis
response despite the reservations of Germany’s Bundesbank.

“The euro is irreversible,” Draghi said at a press
conference in Frankfurt today after keeping the benchmark
interest rate at 0.75 percent. Elevated bond yields “that are
related to fears of the reversibility of the euro are
unacceptable, and they need to be addressed in a fundamental
manner,” he said. The ECB may therefore “undertake outright
open market operations of a size adequate to reach its
objective.”

The euro declined and Spanish bond yields rose on
disappointment that Draghi didn’t signal imminent ECB action.
While Draghi said the Bundesbank has reservations about ECB bond
purchases, and the details of the plan still need to be hammered
out, the proposal nevertheless signals a new chapter in the
battle against the debt crisis. Draghi left open the question of
whether the ECB would print new money by refraining from
sterilizing asset purchases

“Although the ECB did not start to actually intervene in
bond markets today, Draghi sent a strong message that the ECB
will do all it takes,” said Holger Schmieding, chief economist
at Berenberg Bank in London. “Of course, the ECB cannot and has
not solved the euro crisis. But all in all, the chances have
risen substantially that the worst of the current wave of the
crisis could soon be over.”

Strict Conditionality

Draghi said ECB bond purchases would be in the secondary
market, focus on shorter-term maturities and address investors’
concerns about seniority. They would only be used to complement
buying by the rescue fund in the primary market, to which strict
conditionality is attached, he said. ECB officials are working
on the plan and details will be fleshed out in coming weeks.

Unlike the ECB’s previous bond-buying program, which was
shelved in March, Draghi said no decisions have been taken on
whether new purchases would be sterilized. If they aren’t, the
ECB would be entering similar territory to the Federal Reserve
and Bank of England by pumping new money into the system without
draining it elsewhere.

The euro initially climbed as much as 0.5 percent to
$1.2405 after Draghi’s comments before falling to $1.2151 at
6:10 p.m. in Frankfurt. The yield on Spain’s two-year bond
dropped 10 basis points to 4.8 percent, while those on longer-dated maturities rose. Italy’s 10-year yield surged 58 basis
points to 6.32 percent.

No ‘Concrete Measures’

“The market reacted positively when Draghi said the ECB
will address the seniority issue,” said Mohit Kumar, head of
European fixed income strategy at Deutsche Bank AG, Germany’s
biggest bank. “But then when details emerged, it suggested he
is giving guidelines without giving concrete measures.”

Financial markets and politicians had ratcheted up pressure
on the ECB to act after Draghi pledged on July 26 to do
“whatever it takes” to preserve the euro. The Bundesbank
reiterated the next day that it opposes further purchases of
sovereign debt by the ECB, saying they blur the line between
fiscal and monetary policy.

“It is clear and it is known that Mr Weidmann and the
Bundesbank have their reservations about programs that buy
bonds,” Draghi said, referring to the head of the German
central bank.

Bailout Fund

He said governments must stand ready to activate the rescue
fund in bond markets, which would require a country such as
Spain to make a formal request for aid. While Spanish Prime
Minister Mariano Rajoy today welcomed Draghi’s comments, he
declined to say whether Spain will ask the bailout fund to buy
its bonds.

The Fed yesterday pledged to take new policy steps as
needed to promote stronger economic growth and employment. The
Bank of England held its key rate at 0.5 percent and its bond-purchase target at 375 billion pounds ($586 billion).

Draghi said the ECB may introduce additional non-standard
measures and that officials also discussed cutting interest
rates further, raising the prospect they will ease policy as
soon as next month.

“I’m convinced that there’s concerted action being
prepared in the background,” said Stephan Rieke, an economist
at BHF-Bank AG in Frankfurt. “But we’re all treading in the
dark and Draghi isn’t much ahead either. He’s presented a
target, given strong guidance, and now we’ll have to see.”